Eurozone’s return to growth fails to soothe concerns

The eurozone’s economic troubles look set to take centre stage at this weekend’s G20 summit in Brisbane, as meagre growth and glimpses of recovery in parts of the bloc’s ravaged periphery fail to soothe concerns the region remains stuck in stagnation.

The US and other nations are likely to repeat calls on eurozone leaders to launch an aggressive policy stimulus, despite data out on Friday showing the currency area recorded growth of 0.2 per cent between the second and third quarters.

While the numbers were marginally better than expected, the performance of the currency bloc’s three biggest economies – Germany, France and Italy – remained feeble. That will keep the pressure on for radical monetary measures from the European Central Bank, fiscal stimulus from Berlin, and reform from Rome and Paris.

France’s economy grew for the first time this year and Germany avoided sliding into recession. Yet the eurozone’s economic powerhouse only expanded by a slim 0.1 per cent, while France’s leap was largely the result of more government spending, which grew by 0.8 per cent during the quarter.

Italy matched expectations of a 0.1 per cent fall in gross domestic product, showing the eurozone’s third-largest economy is still struggling to recover. Italy has failed to post a quarter of growth since 2011.

Greece, the first country to be hit by the region’s sovereign debt crisis, grew by 0.7 per cent. Spain has already reported growth of 0.5 per cent for the quarter, a jump which some economists attributed to the reforms Madrid passed during the crisis, including changes to its labour code.

“There’s evidence reforms in the periphery are starting to pay off,” said Christian Schulz, of Berenberg Economics. “That shows the eurozone’s response to the crisis wasn’t a complete disaster.”

Yet analysts also warned the pace of growth at the currency area’s edges would falter if its core remained weak.

“Given that the so-called recovery in the periphery has been export-led, the weakness of France and Germany augurs badly for southern Europe’s economies,” said Nicholas Spiro, of Spiro Sovereign Strategy, a consultancy.

Governments’ borrowing costs slipped down when the figures were released, as investors kept faith that weak growth would eventually force the ECB to embark on mass sovereign bond-buying. European stocks were flat and the euro skirted around two-year lows against the dollar.

The region’s economy remains more than 2 per cent smaller than in the autumn of 2008, when the collapse of US investment bank Lehman Brothers left markets reeling. Since then, economies that have pursued more aggressive monetary easing, such as the US and the UK, have surpassed their pre-crisis peaks.

This week, Jack Lew, the US Treasury secretary, warned the currency bloc faced the threat of a Japanese-style lost decade of low growth and falling prices, in an unusually blunt attack on a major ally’s economic policies.

“I don’t think Mr Lew will be convinced by [today’s figures]. He has gone in the direction of saying German growth is not strong enough, complaining particularly about the lack of investment,” Mr Schulz said. “But some of the criticism is misguided. Consumption in Germany, a pillar of eurozone growth, looks strong.”

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Germany’s statistical office said “positive impulses” to growth in the third quarter came from household consumption and trade. The second-quarter contraction was also upgraded from a 0.2 per cent decline in output to a 0.1 per cent fall.

“The German economy is nowhere near any abyss, “ said Carsten Brzeski, of ING Bank, who noted employment was now at record highs. “However, complacency . . . would be misplaced. The trend of the last quarters also signals that the German economy could use a new reform impulse sooner rather than later.”

France’s economy beat expectations and recorded growth of 0.3 per cent, compared with zero growth during the first quarter and a 0.1 per cent contraction during the second.

The better than expected French figures will provide president François Hollande with a brief respite as he struggles to lift the country from its malaise.

But economists were concerned that much of the growth came from government spending.

François Cabau, of Barclays, said: “Public consumption growth was very strong, which in a country having pledged to cut public spending by a record €50bn over the next three years seems an unsustainable source of growth”

Additional reporting by James Politi in Rome, Jamie Smyth in Brisbane and Elaine Moore in London